Bangkok--18 Aug--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed TICON Freehold and Leasehold Real Estate Investment Trust's (TREIT) National Long-Term Rating and its national senior unsecured rating at 'A-(tha)'. The Outlook remains Negative.
The Negative Outlook reflects TREIT's weak occupancy rate relative to its rating, and high tenant concentration. It captures the risks associated with improvement in these measures, where weak demand has had a negative impact on industrial property demand and therefore occupancy rates; while delays in injecting property from TREIT's sponsor, TICON group, has prolonged the improvement in tenant concentration.
KEY RATING DRIVERS
Weaker-than-Expected Occupancy: TREIT's occupancy rate at end-June 2017 remained at about 78%, the same as of end-2016 while the average lease-term-to-maturity remained at 3.3 years. Most of the contracts which had expired in 1H17 had been renewed. Moderate renewal risk exists, as 6% of TREIT's lease contracts, based on leased area, will expire in 2H17 and another 19% in 2018. Renewal risk is mitigated by TREIT's high retention rate and location scarcity. Fitch expects the average occupancy rate to improve in 2018, in line with an expected recovery in demand, driven partly by the government's newly promoted investment scheme on the Eastern Economic Corridor.
High Tenant Concentration: The 10 largest tenants contributed around 50% of revenue in 2016. Fitch expects concentration risk to persist longer than initially forecast, as a change in TICON group's major shareholder caused the group to suspend asset sales in 2016 - and also in 2017 due to plentiful liquidity from the capital increase. This has delayed TREIT's portfolio growth in both years, as TICON group is TREIT's main sponsor. TREIT is seeking assets from other developers, but the potential asset size would not compensate for the assets available from TICON group. TREIT has no plans to develop its own properties.
Debt-Funded Growth: TREIT's net-debt/investment-property value was 20.8% at end-June 2017 but is likely to increase to about 30% by end-2017. TREIT plans to invest up to THB750 million in assets of other developers in late 2017 with 100% financing via debt. TREIT's medium-term financing policy aims to maintain gross debt to total assets at about 30% (which turns into net-debt/investment-property value at about 28%). Fitch expects TREIT to finance its larger investment in the future via a mix of debt and equity.
Sound Asset-Liability Matching: Fitch expects TREIT to maintain sound asset-liability matching. The average lease term-to-maturity of TREIT's investment properties was about 3.3 years at end-June 2017, with about 19% of its total leasable area secured by long-term lease contracts expiring between 2023 and 2027. TREIT refinanced all its outstanding bank loans of THB1.8 billion with three- and seven-year bonds in April 2017. The average term to maturity of the bonds was 5.1 years at end-June 2017, with the first repayment of THB800 million in 2020. TREIT's debt is all unsecured, with unencumbered asset-cover of 4.1x at end-June 2017.
Well-Located Assets: TREIT's rating reflects the contractual certainty of revenue from medium-term lease contracts on its modern factory and warehouse properties, which are in strategic locations in Thailand.
DERIVATION SUMMARY
TREIT is an industrial REIT, with assets mainly sponsored by one of the leading developers of industrial properties for rent in Thailand, i.e. TICON Group. TREIT is significantly smaller than WHA Corporation Public Company Limited (BBB+(tha)/Negative), a leading developer of industrial estates and built-to-suit industrial properties for rent in Thailand. TREIT has higher earning visibility from its property rental business and no development risk exposure, while WHA has a large development exposure with project completion risk and about 60% of its EBITDA comes from its industrial land sales business, which is subject to cyclical demand. TREIT's financial leverage is lower than that of WHA, although it could increase in the medium term, and TREIT has high financial flexibility - given unencumbered asset cover of 4.0x and an earliest debt maturity in 2020. WHA's financial leverage has surged due to acquisitions in 2015, and it faces a large debt repayment burden in 2016-2017.
TREIT has a property portfolio size and tenant diversification level similar to that of Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), a leading community mall developer in Thailand. However, SF has development-risk exposure and TREIT has a significantly wider EBITDA margin of 75%-80%, compared with SF's 40%-45%. TREIT also has lower financial leverage, but the gap could narrow over the medium term.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Additional investment of THB750 million in 2017, with 100% debt financing; THB2 billion in 2018 and THB2.4 billion in 2019 with 30% debt financing.
- Renewal rate of 85%, with four to six months to seek new lessees in 2017-2019.
- EBITDA margin of 75%-80% in 2017-2019.
- No development or significant maintenance capex over 2017-2019.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
Fitch may revise the Outlook to Stable from Negative if TREIT demonstrates that the negative rating guidelines are unlikely to be met on a sustained basis.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- sustained weakening in the occupancy rate to below 85%;
- net-debt/investment-property value increasing above 30% (end-June 2017: 20.8%), net-debt/EBITDA above 4.5x (end-June 2017: 3.5x) or FFO-fixed charge coverage below 3.5x (end-June 2017: 4.5x) on a sustained basis; and
- inability to expand the portfolio efficiently to improve its top-10 tenant concentration to below 40% of revenue.
LIQUIDITY
Comfortable Liquidity: Fitch expects TREIT to have enough liquidity in the next two to three years to comfortably cover interest payment, with EBITDA/interest expense expected at above 4.5x. Minimal maintenance capex is likely for the next two to three years. Its liquidity for new investment should be supported by its ability to access to capital market for both debt and equity.